Government delivers rail shock

By PAM GRAHAM

Toll Holdings has done a rail track deal with the Government, shocking Tranz Rail and potential new suitor Genesee & Wyoming.

US company Genesee was considering events, a spokesman said. Tranz Rail was evaluating developments.

Finance Minister Minister Michael Cullen, who previously had accused Toll of acting in bad faith and pursuing a collision course with the Government, was yesterday selling the merits of the new deal and criticising Tranz Rail for poor briefings on the first buyback plan.

The new deal was struck after negotiations all last week and into the weekend, following a meeting on June 30 between Toll managing director Paul Little and Cullen.

Toll is now going for total control of Tranz Rail and will sell the track to the Government for $1 if successful. The Government has pledged $200 million to improve the network over five years and Toll will spend $100 million on new rolling stock.

Under this plan, the Government will not buy shares in Tranz Rail and the financial rules of engagement between Tranz Rail and the future track-owning company are simpler.

Toll will have an incentive to increase freight volumes and also must meet performance standards which are slightly tougher than those in the Government's original Tranz Rail bailout plan.

The nightmare scenario of Toll gaining unfettered control of the rail network was gone, said Cedric Allan, spokesman for Tranz Rail's major customers.

Little said Toll's present 95c-a-share offer would be dismantled and a six-week process would start for the new offer.

The first Government track buyback deal becomes dormant but can be revived if Toll does not win control.

Toll has withdrawn a condition requiring independent verification of the interim accounts and has put a $50 million figure on a condition that allows it to walk if there is a material change in the business.

News of the new deal eclipsed the release of the independent report on Toll's first 95c a share offer earlier in the day.

In it, directors came out against the track deal they had brokered with the Government.

Based on a Grant Samuel report that valued Tranz Rail shares at between 68c and 87c and the company's Government track buyback plan at 97c to $1.03 a share, they went for the Toll offer if certain conditions were dropped.

The independent report traversed Tranz Rail's financial history since privatisation and detailed its current "precarious" position.

"Tranz Rail is currently severely under-capitalised and needs a further substantial equity injection," Grant Samuel said.

The company had total debt of $341 million, of which at least $185 million was repayable in the next 18 months.

It would not generate enough cash to meet its capital expenditure commitments next year.

A legacy of creative funding solutions had been inherited from previous management.

Grant Samuel valued the Interisland line at $247 million to $267 million and the freight forwarding and trucking business in the range of $30 million to $35 million.

It said the rail freight business' revenue forecasts assumed business would be won from the fiercely competitive trucking sector with the introduction of 24ft (7.3m) containers.

There is evidence that the Government and Tranz Rail had moved apart since striking their track buyback deal.

Directors said in the target statement that Tranz Rail had failed to agree to key items with the Crown.

Government officials said there was no intention to negotiate anything in addition to the original heads of agreement with Tranz Rail.

Shareholders said the day had been perplexing and 95c cash was looking more attractive.

Toll's bid has been seen as attractive because it brings in new management. Senior executives' contracts will be triggered by a takeover and payouts of up to two years' pay are possible.

About 46 per cent of Tranz Rail's outstanding shares are controlled by institutional shareholders.

If Toll wins control Tranz Rail will be delisted.

Toll already owns 19.9 per cent of the company.

Speculation emerged last week that Genesee & Wyoming had serious intentions towards Tranz Rail.

The American company operates railways around the world, including in Australia, and its executives have been in New Zealand.

It does not have any arrangement with the Government.